I think people might be missing some of the nuance inherent in what’s happened to markets this month.
Or maybe they’re not really “missing it” as much as they are deliberately glossing over it because almost by definition, nuance takes some of the fun out of things, no matter what you’re talking about.
Take this, from former trader-turned Bloomberg columnist Richard Breslow, for instance:
Market participants have just become so inured to the expectation that God, in the guise of a central banker, will always provide. And they feel betrayed when asked to try to fend for themselves. Do you think birds, who after all are born to fly, feel more or less betrayed when booted out of the nest than traders, who, in concept, are meant to make continuous value judgments, when they are expected to think for themselves?
When the little birdie is sent packing it sinks a little, furiously starts flapping its wings and eventually goes happily, even gloriously, on its way. No fountain pen is awarded to mark this coming of age ceremony. Just the avoidance of smacking into the ground. You would think that investors would celebrate the challenges of navigating two-way markets with a little more enthusiasm. So far the most upbeat assessment I’ve heard is hopeful thinking from market-makers that they will be able to earn more spreads if their clients are forced to panic.
Ok, so obviously that’s funny and it’s delivered with the typical Breslow-vian flair for the derisive, but I’m not sure the “little birdies” are feeling betrayed by central bankers as much as they’re feeling betrayed by circumstance.
In the same note, Breslow goes on to write that “one of the worst, if easiest, messages peddled was that the withdrawal of liquidity would be a painless exercise if done with the sagacity promised [and] maybe that would have worked if inflation truly was dead rather than mis-measured and sleeping.”
The key part there is “maybe that would have worked.” I think everyone (including and especially central bankers) was depending on that “working”. Indeed, one could make a pretty convincing argument that the viability of the “Goldilocks” narrative was severely undercut by Trump’s fiscal policies, a situation he made worse by deciding to put Janet Yellen out to pasture.
Taking that latter point first, it’s not so much that there’s a material difference between Powell and Yellen (that assumed “slightly more hawkish” tilt notwithstanding), it’s just that you don’t inexplicably replace the person in charge at a critical juncture without cause. You wouldn’t, for instance, oust the CEO of a publicly-traded company for absolutely no reason at a pivotal point for the company. Even if the market knew the successor was going to largely stick to the script, and even if that successor had a fantastic track record, you’d probably see a “sell first, ask questions later” mentality in the market because you know, “why the fuck would anyone do that?”
“While Jay Powell’s credentials are strong, the market has yet to assess his ability to guide policy,” BofAML wrote earlier this month, adding that “unlike for Bernanke or Yellen, the market cannot go back to Powell’s academic writings to infer his thinking in a broad range of crucial economic topics.” This uncertainty, the bank suggested, is partially responsible for “risk assets being on a fire sale.”
As far as the former point (the fiscal policy bit), that’s a big deal. It threatens “Goldilocks” by raising the odds that inflation pressures build faster than people were expecting. That kind of fiscal policy lean would have been welcomed years ago (it would have taken some of the pressure off central banks), but not now. Now it’s a source of consternation because to the extent everyone was depending on, as Breslow puts it, inflation continuing to remain “sleepy”, well Trump just slapped “sleeping” inflation across the face and despite the fact that his hands are small, that’s a pretty big slap when the economy is already at full employment.
So when you think about why the “little birdies” are feeling so betrayed, I think it’s important to at least consider whether their sense of incredulity is aimed not at mama bird, but rather at the exogenous shocks that are compelling her to push them out of the nest earlier than she might have otherwise.